2013 Industry Perspective

Industry Perspectives for 2013

Booz & Company has developed its annual collection of Industry Perspectives addressing major challenges and new opportunities for companies to consider in 2013. Our practice leaders developed the perspectives from industry discussions, observations of shifting market dynamics, and careful analysis of the sectors Booz & Company serves.

Click the center circle on each graphic to read the full text of the Industry Perspective.

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Outlook for 2013: The pace and complexity of technology development will continue to increase, with more advances happening in systems with intricate linkages throughout the vehicle. Big Industry Shift: The long-standing OEM-focused model of innovation is becoming decentralized: with OEMs serving as integrators and suppliers owning more technological innovation. Trend to Watch: Rapid and broad innovation is spanning several scientific disciplines—chemistry (batteries), materials science (lightweight materials), and consumer electronics (infotainment). Data Point: Overall sales volumes are lower than in the mid-2000s, but manufacturers and suppliers are healthier, sales are exceeding expectations, and costs are down. Advice for the Year Ahead: OEMs should focus R&D spend in critical areas while strategically ceding others to suppliers, who then must improve how they manage the technology project portfolio. Key Quote: Automakers and suppliers must innovate rapidly to compete and achieve goals like hitting stringent fuel standards, boosting car electronics, and attracting younger buyers. Outlook for 2013: Revenues declined across the board in 2012, and 2013 likely won’t bring immediate relief; companies will need to find untapped sources of profitability. Data Point: M&A activity fell by 47% on a dollar basis in the first half of 2012, compared to the first half of 2011. Big Industry Shift: Companies that invested heavily in Asia learned it’s a more complex marketplace than anticipated; many will reassess their strategies here in 2013. Trend to Watch: The changing feedstock landscape has created opportunities for a number of players, making this a hotbed of activity for 2013 and beyond. Advice for the Year: Chemicals companies must reassess competitive positions and reset priorities accordingly, thereby shifting focus to activities that increase operational excellence. Key Quote: Winning companies have already seen success by carefully determining where to compete then creating a strategy; this is an unsettled but potentially rewarding time. Outlook for 2013: Sell-side cost pressure, management fee pressure on the buy side, asset electronification, changes in Europe, and demand for analytics will all impact this diverse segment. Data Point: In 2010, 10% of the index CDS market was traded electronically By 2015 we expect that to increase to between 60% and 90%. Big Industry Shift: Firms will think more about the big picture - operating models, geographic footprints, even businesses to pursue - to align themselves with today’s environment. Trend to Watch: A growing focus on analytics and data, a potential US$35 billion market, will create both opportunity and burden for capital markets players. Advice for the Year: Sell-side firms must consolidate or eliminate redundancies and inefficiencies across organizational silos rather than making traditional, less-effective budget cuts. Key Quote: Performance is still important, but brokers now prefer low-cost funds even if they slightly underperform higher-cost funds. Outlook for 2013: Rock-bottom interest rates and increased capital requirements will continue to challenge banks’ near-term profits. Big Industry Shift: Advances in technology, as well as shifting consumer attitudes and expectations, are disrupting the integrated banking value chain. Trend to Watch: More banks are partnering with nonbanks to drive innovation – structured correctly, these partnerships can add approximately 10 to 20% in new top-line revenue. Data Point: Industry profits and return on assets will barely move in the next 3-5 years, growing just 1 to 2 percent annually. Advice for the Year: Put the right cost structure in place to grind out profits now, but keep scanning the long-term horizon for new, nontraditional revenue opportunities. Key Quote: Don’t ignore culture; to win today, bank leaders must motivate their talent base and shape a corporate culture that reinforces strategic and operating imperatives. Outlook for 2013: Price realization and technology investments top the year’s agenda for wealth management firms. Big Industry Shift: New technologies are dramatically altering the client-advisor interaction and the very nature of investment advice. Trend to Watch: Financial advice is becoming more social; more companies will use social media to share investment ideas, track asset managers’ strategies, and create peer investor networks. Data Point: High-net-worth clients often pay fees that are 40-60% lower than firms’ published fee schedule, with entire portfolios discounted by 30-40%. Advice for the Year: Resist the fear of client and asset attrition and take a fresh look at pricing practices Differentiate by improving the client experience with technology-enabled real-time advice. Key Quote: Wealth management firms that aren’t afraid to test the status quo by embracing digitization will find real opportunity in 2013 and beyond. Outlook for 2013: The cost of care will continue to rise, the industry will become much more consumer-centric and many organizations’ sustainability will be threatened. Big Industry Shift: Providers will see more patients engage in comparison shopping between offerings, while health plans’ customer base is starting to shift from groups to indviduals. Trend to Watch: IT innovations hold promise for solving strategic challenges – “big data” could generate actionable consumer insights, while social media could engage and mobilize consumers. Data Point: In 2012 alone, healthcare costs rose two times faster than inflation, while the number of individual members in high-deductible plans has tripled since 2006. Advice for the Year: Addressing the hurdles of consumerism and affordability will require new capabilities and cooperation between those that deliver care and those that finance it. Key Quote: Healthcare players should take a page from Apple’s playbook and “think different” about customers, costs, tech investments, and M&A decisions. Outlook for 2013: This year will be time for taking stock of 2012’s myriad developments, determining best bets, and tailoring budgets to make room for investments. Data Point: The “patent cliff” will put US$250 billion of global sales at risk by 2015. Big Industry Shift: To take advantage of the host of positive developments from 2012, pharmaceutical companies will need to make a renewed commitment to fiscal retrenchment. Trend to Watch: Significant advances in scientific technology, R&D model reinvention, cooperation between firms, and emerging market growth will continue to affect the industry well beyond 2013. Advice for the Year: Winning companies will take a magnifying glass to their operations, uncover distinctive capabilities and reinvent their operating models with those in mind. Key Quote: Pharmaceutical industry leaders are looking for a fresh approach to their challenges – innovation and funding the pipeline will continue to be big themes in 2013. Outlook for 2013: Uncertainty reigns as we wait to see if the pattern of slowing growth in North America, Europe, and Asia-Pacific can be broken. Big Industry Shift: More industrial companies are adopting strong-form product management for the agility needed to operate in today’s dynamic global environment. Trend to Watch: Digital technologies are permeating every aspect of the industrial organization, from product innovation to operations to channel integration with customers and partners. Data Point: Growth in revenue among North American industrial companies slowed to 5.4% in 2012, after growing 12% in 2011. Advice for the Year: Don’t wait until demand recovers to invest in growth – now is the time to rethink costs and free up funds. Key Quote: Industrial companies have to be prepared for changing circumstances in 2013 with business models that can turn on a dime. Outlook for 2013: Oil and gas prices are set to level off and companies will have to work harder for profits in the year ahead. Big Industry Shift: The industry’s highly integrated, diversified business models are giving way to specialization bolstered by a set of differentiating capabilities. Trend to Watch: Global demand for oil is slowing, while supply is steadily increasing – a reversal of the trend that lifted prices over much of the past decade. Data Point: By 2020, oil prices will likely drop to US$70-$90 per barrel, though prices can vary widely; gas prices are likely to stabilize around $5 per mcf. Advice for the Year: Oil and gas companies should focus on the capabilities that set them apart from competitors and exit or outsource activities that don’t align. Key Quote: Specialization, efficiency, and well-run joint ventures are critical factors for growth in lean times – in 2013, generalists will be left behind. Outlook for 2013: Telecom operators will need to double down on efforts to monetize the flow of network traffic and capture more revenue now going to Internet players. Big Industry Shift: Value is moving away from big telecom operators and toward device makers, as well as newer, “over-the-top” Internet-based players. Trend to Watch: Operators will increase their restructuring efforts in order to fund expansion and investment plans in their chosen markets. Data Point: Five key capabilities will drive success for telecom players: enhanced customer analytics, customer experience management, digital enablement, strategic partner management, and yield management. Advice for the Year: No telecom player can build and perfect all five capabilities simultaneously; they should focus on those most critical to their chosen business model. Key Quote: The digital revolution is in full swing; telecom operators must choose the right strategic direction today to be leaders, not laggards, in the future. Outlook for 2013: Low interest rates, low electricity prices, and pressure around storm preparedness make 2013 an opportune time for utilities to invest in infrastructures of the future. Big Industry Shift: As the focus increases on reliable electricity provision, network innovation will become a focal point for utilities, to enhance infrastructure resilience. Trend to Watch: Next-generation capabilities will form the backbone of new, highly digitized infrastructure and business models. Data Point: Capital expenditure requirements across the US utility industry are expected to exceed US$100 billion annually through 2020. Advice for the Year: Don’t take the current economic environment for granted; invest now In the past, prices have risen rapidly when conditions shifted. Key Quote: Deciding how to allocate capital among a variety of new investment opportunities will be the central challenge for utility executives in the coming years."
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